AN ANALYSIS OF THE IMPORTANCE OF THE TREASURY REGULATIONS AND OTHER FACTORS ON SECTION 482 COURT CASE OUTCOMES (TRANSFER PRICING)

The study evaluates the factors important in determining Section 482 transfer pricing court case outcomes. The examination included those factors set out in the 1968 Treasury Regulations plus additional factors cited in the literature. All Section 482 cases (22 cases) involving the establishing of an appropriate transfer price for sales of tangible property between related parties were included in the study. The factors were analyzed using a combination of factoring techniques and discriminant analysis.;Of the 22 cases under study only one case resulted in the use of the resale pricing method. This finding is in agreement with earlier works suggesting that this method is the least used of those provided in the Regulations.;All but one case involved a situation in which the related party was in a favorable tax position, and the majority of cases involved foreign subsidiaries located in a "tax haven" environment. Because of the type of case entering the courts, the results of this study for tax planning purposes must be limited to situations involving related parties in which the U.S. taxpayer can gain a tax advantage by manipulation of the transfer price.;Based on this analysis, of the original 19 independent factors included in the study, 9 factors were found to have an impact of the courts decision. Three of the nine factors were factors not considered by the 1968 Treasury Regulations. The results suggest that in cases where the Treasury Regulations are easily followed (i.e., identical sales, similar sales with easily identified price effects) the courts have been applying them. However, in other cases, the courts have been looking to the reasonableness of the profit split in reaching their decisions.